Publications
“Strategic Communication: Prices versus Quantities”, with Wouter Dessein and Niko Matouschek. Journal of the European Economic Association, Vol. 8, No. 2-3, pp. 365-376, April-May 2010.
“Centralization versus Decentralization: An Application to Pricing by a Multi-Market Firm”, with Wouter Dessein and Niko Matouschek. Journal of the European Economic Association, Vol. 6, No. 2-3, pages 457–467, April-May 2008.
“When Does Coordination Require Centralization?”, with Wouter Dessein and Niko Matouschek. American Economic Review, March 2008.
We consider a multi-divisional organization in which decisions must be responsive to local circumstances but also coordinated with each other. Divisional managers are privately informed and communicate their information strategically. The only available formal mechanism is the allocation of control over decisions. We show that a higher need for coordination improves communication under decentralization but worsens communication under centralization. As a result, a decentralized organization can be optimal even when coordination is extremely important. Centralizing decision making in an independent headquarter is optimal when division managers are sufficiently biased towards their own divisions' profits and the need for coordination is sufficiently big. Centralizing decision making in one of the operating divisions is optimal if this division has more private information than the other divisions, the own division bias of division managers is sufficiently small and the need for coordination is sufficiently big. Finally, division managers communicate more information to an independent headquarter than they do to each other. As a result, a headquarter can be better informed about local circumstances than the division managers, in spite of the fact that the headquarter does not directly observe any information itself.
“Optimal Delegation”, with Niko Matouschek. The Review of Economic Studies, Vol. 75, No. 1, pp. 259-293, January 2008.
We analyze the optimal delegation of authority by an uninformed principal to an informed but biased agent. When the principal cannot use message-contingent transfers, she offers the agent a set of decisions from which he can choose his preferred one. We fully characterize the optimal delegation set for general distributions of the state space and preferences with arbitrary continuous state dependent biases. We also provide necessary and sufficient conditions for commonly observed organizational arrangements to be optimal. Finally, we investigate how changes in the economic environment affect the agent's discretion.
“Relational Delegation”, with Niko Matouschek. The RAND Journal of Economics, Vol. 38, No. 4 (Winter, 2007), pp. 1070-1089.
We explore the optimal delegation of decision rights by a principal to a better informed but biased agent. In an infinitely repeated game a long lived principal faces a series of short lived agents. Every period they play a cheap talk game ala Crawford and Sobel (1982) with constant bias, quadratic loss functions and general distributions of the state of the world. We characterize the optimal delegation schemes for all discount rates and show that they resemble organizational arrangements that are commonly observed, including centralization and threshold delegation. For small biases threshold delegation is optimal for almost all distributions. Outsourcing can only be optimal if the principal is sufficiently impatient.
Working Papers
“Recruitment and Selection in Organizations”. Coming soon.
“ When Does Adaptation Require Decentralization?”, with Wouter Dessein and Niko Matouschek.
We examine the relationship between the organization of a firm and its ability to adapt to changes in the environment. We show that even if lower-level managers have superior information about their local conditions, and incentive conflicts are negligible, a centralized organization can be better at adapting to changes in the environment than a decentralized one. We then show that this result reverses some of the standard intuitions about organizational structure. For instance, an increase in competition that makes adaptation more important can favor centralization over decentralization.
“Resource Allocation in the Brain”, with Isabelle Brocas and Juan Carrillo. CEPR D.P. 8408.
When an individual performs several tasks simultaneously, resources must be allocated to different brain systems to produce energy for neurons to fire. Following the evidence from neuroscience, we model the brain as an organization in which a coordinator allocates limited resources to the brain systems responsible for the different tasks. Systems are privately informed about the amount of resources necessary to perform their task and compete to obtain the resources. The coordinator arbitrates the demands while satisfying the resource constraint. We show that the optimal mechanism is to impose to each system with privately known needs a cap in resources that depends negatively on the amount of resources requested by the other system. This allocation can be implemented using a physiologically plausible mechanism. Finally, we provide some implications of our theory: (i) performance is inversely related to the difficulty of the task and can be flawless for sufficiently simple tasks, (ii) the dynamic allocation rule exhibits inertia (current allocations are increasing in past needs), and (iii) different cognitive tasks are performed by different systems only if the tasks are sufficiently important.
“Shared Control and Strategic Communication”. New version coming soon.
This paper studies the optimal allocation of decision rights between an uninformed principal and an informed agent when interdependent activities need to be adapted to local conditions. While the principal cares only about overall profits the agent may favor higher, or lower, levels for each activity than the profit-maximizing level. The principal has limited commitment power and can only commit to an ex-ante allocation of decision rights. Whenever the principal retains some (or all) decision rights the agent communicates his information strategically, i.e. via cheap talk. We show that if activities are complementary the principal can always improve the informativeness of communication by sharing control with the agent, while sharing control over activities that interact as substitutes always worsens communication. As a result of this communication advantage, sharing control over complementary activities can be optimal, while control over activities that interact as substitutes is optimally allocated to the same party.
Work in Progress
“The Art of Brevity”, with Heikki Rantakari.
“Indispensable Experts”, with Heikki Rantakari.
“Persuading Skeptics and Reaffirming Believers”, with Odilon Câmara.
Research Interests
Organizational Economics, Contract Theory, Industrial Organization, Economics of Information, Game Theory.
Teaching
ECON-251. 2010-present. Microeconomics for Business.USC Marshall School of Business.
GSBA-511. 2007-2009. Microeconomics for MBA. USC Marshall School of Business.
